Recently, I finished a very interesting book “The Bitcoin Standard”. In this article I wanted to talk about one aspect of this book. The author, Saifedean Ammous, compares Bitcoin to gold and describes it as digital gold. In one of the chapter he talks about how a certain standard could lead to technological improvement and how this already happened in time. Like always, this article is not financial advice and for entertainment purposes only. With this being said, lets take a look why BTC can push us into new technological dimensions.
Gold-Standard: A Golden Era?
Before we look into the technological improvements we have to define the term of sound money. In a nutshell, sound money is currency that is neither depreciating nor appreciating all of a sudden. Its purchasing power stays relatively constant over the long term which is aided by mechanisms in a free market. The main properties of sound money are scarcity, divisibility paired with a good stock to flow model. Currently, the governments of the world can print their own money like they want. Unfortunately, this is not sound money because it is not fulfilling the scarcity property. In times like these the store of value is not given and people have to search for other investments. This was not always the case.
Earlier in time (before 1914) the worlds economic system operated on the Gold Standard. The thing with gold is that this precious medal can be taken as sound money. It fulfills all of the properties. It is scarce because you have to mine it and therefore put some effort in and it can be divided so that you have a different payment options. Furthermore, its stake to flow model looks very promising since you can not “create” gold out of nothing like it is possible with paper money by money printing. In these times the impact of sound money on society and development could be seen in more than just the level of savings, but also in the kind of projects that were invested in.
Due to the fact that gold can be seen as a storage of value people were more likely to think long-term. If you would know that your money is today worth as much as in a year you would do the same. This is why people in this time were investing in projects that require a long time pay off. As a result of this behavior some of the most important innovations in human history happened in the end of the nineteenth century.
Zero to One vs One to Many
The book emphasizes that our modern world was invented in the gold standard years prior to World War I. If you think about it, the twentieth century was the century that refined and improved all of the ideas that were made in this golden era. It is very easily forgotten that the step from nothing to something is much harder than the step from something to a lot. A good example would be the financial sector. How many millionaires are saying that the first million is the hardest? Another example would be the usage of theorems in mathematics or science. Somebody has to discover the theorem first (Zero to One) so that other scientist can prove some more exciting methods that they started working on after the theorem was discovered (One to Many). To put it in a more general perspective: the first step is always the hardest one and requires a lot of energy and patience. The second step is always a question of scaling, marketing and optimization.
Lets look at some examples that the book gives us. The first example would be something that the majority of people in the developed countries are using every day. Hot and cold running water, toilets and central heating. These inventions were the main factor in the elimination of across the globe and allowed the growth of the urban areas. Another example is electricity, internal combustion or the mass production. Our modern society was build around the utilization of energy. All of these methods were invented in the nineteenth century. The transportation system like automobiles or airplanes were also discovered in this golden era as well as the electric elevator. And lets not forget one of the most important inventions at that time: the telephone. It could be argued that our century is the era of mass communication. But if you take a step back and look at the roots of this it is clear that everything our society is build on including computers and the Internet is all thanks to the inventions of the nineteenth century.
New Era with the Bitcoin Standard?
So what happened? Why did the governments abandon this gold standard? One of the most important reasons was the spending during the wars. Because governments couldn’t pay their military at some point they had to change the economical payment system which resulted in the paper money that we have today. Of course this is described very shortly and there are more steps in between like the backing of the dollar with gold and so on but this should not be the main topic of this article. The main point is that we are living now in a time without sound money.
With the 2008 financial crisis a small light at the end of the tunnel raised. Bitcoin was invented and with it the hope for a more stable financial system. With the growing adoption of Bitcoin the main advantages of Bitcoin are becoming clear. BTC is the perfect sound money! It is scarce (maximum amount is 21 million) and is dividable into very small portions. Its stock to flow model is not changeable due to the fact that is hard implemented and cannot be changed. This leads to the question: Could Bitcoin be the next sound money? And could this lead to a new era of innovation?
Some could argue that we are already seeing innovations in the financial sector. The whole DeFi space is getting more and more adoption and slowly putting the governments and their Central Banks under pressure. Furthermore, BTC is giving back the freedom to people. But this is a topic for itself. A good example will be El Salvador. It looks like the adoption of Bitcoin is going very well and could lead this country out of its poverty. Of course this is mainly speculative and we would see results in some years. But it is very exciting to be around in such times. Another big innovation that could be coming towards us is the Metaverse. More and more developers are innovating this space and developing applications that are interesting. This topic could also be covered by its own article which I am currently working on.
To summarize this article, I want to mention that I got this idea from the mentioned book that I am reading. I am very curious to see the development in the next few years. In my opinion the regulations will slow the process down but it will never stop. At some point there will be a flip between the generations that are currently living and cryptocurrency will get its adoption. Of course crypto needs some regulations. The best example seems to be Tether but this is also very speculative. I really hope you enjoyed this article and would be very happy for any kind of feedback or your thoughts on this topic!
Published by ga38jem on
On 16th October 2021